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Solar energy may be the biggest investing opportunity in our lifetimes, but that doesn't mean it's going to be an easy way to make money. Investors who have been following the industry for a while may remember 2012 as the last time solar stocks crashed and a flood of companies went bankrupt. Four years later, we may be heading for a similar dynamic in the solar industry.
New reports indicate that solar panels are being sold for rock-bottom prices. Those prices will combine with more difficult financing for solar companies, potentially leaving some big manufacturers with no option but bankruptcy in the next year. Here's how it'll play out, and who to watch closely.
Deja vu for solar
The problem solar companies faced in 2012 was rapidly falling solar-panel prices, which crushed thin margins and left no money to pay for operating and financing costs. To make matters worse, most manufacturers had borrowed money -- in many cases billions of dollars -- to build manufacturing plants, so the decline in panel prices left them no option but to restructure their businesses.
If you look closely at financial statements and panel-price trends, you'll see the same thing happening today. Consider Canadian Solar (NASDAQ: CSIQ), which is one of the biggest and most profitable of the Chinese solar manufacturers. The company generated $0.63 per watt in sales last quarter and had a gross margin of $0.11 per watt. After subtracting operating and financing costs, the net margin on the business was $0.03 per watt. But that's before panel prices fell through the floor.
In the second quarter of 2016, the Solar Energy Industries Association and GTM Research estimated that solar-panel prices were $0.59 per watt, while recent reports have that number falling to $0.40 per watt or less. If true, a $0.03-per-watt margin at Canadian Solar could turn into a $0.16-per-watt loss on every watt sold. And it sold 1,290 MW last quarter alone, so the losses could be big.
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A problem facing every solar manufacturer
The challenge facing Canadian Solar isn't unique. I've also outlined the production level, gross margin, and net margin for Trina Solar Ltd. (NYSE: TSL), JinkoSolar Holding (NYSE: JKS), and JA Solar Holdings (NASDAQ: JASO) in the second quarter. You can see that all four have similar margin profiles, and will all be reporting losses if solar panel prices drop $0.10 to $0.20 per watt:
Data source: Company earnings releases.
These are some of the strongest solar manufacturers in the world, and they likely have massive losses on their horizon. If stronger companies are in trouble, how are weaker companies like Yingli Green Energy and ReneSola supposed to survive?
Financing will be the key to survival
In 2012, Chinese state-run banks played a big role in keeping manufacturers alive, keeping short-term debt available to most companies that survived. But not everyone got the funding they needed, and big players like LDK Solar and Suntech Power both went bankrupt as a result. This time around, companies will likely need similar support, but we don't know if it will be there.
The four companies I highlighted above will be bellwethers for the solar industry because of their size and relative financial strength. If they can't survive, companies further down the quality spectrum will struggle as well. Keep an eye on margins and potential losses over the next year, because if the pricing reports are true, it won't be a pretty picture in the solar industry.
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Travis Hoium has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.